The Internal Revenue Service will continue requiring tax preparers to obtain a tax identification number, the agency announced Monday, days after the most recent ruling in a case challenging its authority to regulate preparers.

Monday’s action permits IRS to continue, as tax filing season revs up, to use some 700,000 preparer identification numbers it is already using to monitor performance.

Under recently departed Commissioner Doug Shulman, the tax agency—urged on by large tax service providers such as H&R Block and Intuit—launched an effort to improve the competence of return preparation services by requiring each to file online for a preparer identification number to allow their work to be tracked as well as enroll in continuing education courses leading to examinations for certification. The goal is to reduce fraud and identify theft.

Three individual tax preparers objected to the new regulation. They filed a lawsuit brought by the Arlington, Va.-based libertarian Institute for Justice, which argued that the IRS as an administrative agency lacked authority to regulate the profession.

On Jan. 18, 2013, U.S. District Judge James Boasberg agreed, calling the regulatory scheme “a power grab” and saying IRS shouldn’t pursue the program without a statute from Congress. The agency was enjoined from enforcing its regulatory requirements on return preparers.

“This is a great outcome for tax preparers nationwide,” said Dan Alban, lead attorney for the three independent tax preparers who had challenged the suit. “It allows them to continue preparing tax returns this tax season without having to get permission from the IRS. This is the best of both worlds—preparers who value the certification can still obtain it, but no tax preparer is forced to get a government permission slip to earn a living.”

On Jan. 23, the Justice Department, on behalf of the IRS, filed a request to the judge to suspend the injunction pending an appeal. In response, the district court modified its order, clarifying that the broad order does not apply to IRS’s requirement that preparers obtain identification numbers. The U.S. district judge on Friday softened the Jan. 18 ruling striking down the agency’s broader effort to require preparers to pass exams and be certified.

“The IRS continues to have confidence in the scope of its authority to administer this program and is working with the Department of Justice to address all options, including a planned appeal,” the agency said in a statement said. IRS also stressed that the ruling does not affect the regulatory practice requirements for certified public Accountants, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries.

In rejecting Justice’s argument, the judge acknowledged that "shutting down the program would be costly and complex, and such steps would be rendered unnecessary if the court's decision is reversed" on appeal.

According to Justice’s brief, the IRS return preparer program is “far-reaching, impacting between 600,000 and 700,000 preparers who are responsible for a substantial number of the more than 80 million returns filed each year.” In more than two years of implementation, IRS has established more than 250 testing centers in 50 states.

“Over 700,000 return preparers have registered with the service, nearly 100,000 return preparers have registered to take the test, and the service has received over $100 million in registration and competency testing user fees,” it said. “To date, the service has spent over $50 million to get the program up and running. Immediately discontinuing the program would result in a substantial disruption to tax administration. Thousands of return preparers who have already submitted their user fees would demand refunds, and the United States would likely face numerous lawsuits – including class action lawsuits.”

A “cop on the beat” monitoring competent tax return preparers has long been a goal of the National Association of Enrolled Agents, according to Robert Kerr, the group’s senior director for government relations. Requiring minimal competency rather than merely “the ability to hang out a shingle and fire up the individual tax software you bought at Sam’s Club” is good for three reasons, Kerr said. “It’s pro-taxpayer, it’s good for the profession and it’s good for tax administration,” he said.

“My people are troubled by increasingly sophisticated taxpayers who go return preparer shopping, looking to save some money even if the return isn’t prepared accurately or even signed,” he said. The IRS is “trying to uphold standards in a world that acknowledges no standards.”

Jeffrey Trinca, a longtime Senate tax counsel now a vice president of Van Scoyoc Associates, said the court ruling does raise questions “coming right in the middle of tax season when the IRS is already confronting problems because of the lateness of Congress” in making tax code changes. But the issue of ID numbers “shouldn’t cause confusion,” he said, “because if you don’t have a number by Feb. 4, you shouldn’t be doing tax returns at all.”

Trinca views the court’s ruling as unusual, “a district court deciding that the way the IRS administers the tax system on its face can be thrown out in a summary judgment without a trial.” He sees it as likely to be overturned on appeal.

The $250 or $350 it might cost a preparer to take a course and earn certification is not much of a burden compared with going to law school and passing the bar, Trinca added, noting that the system has already helped IRS track down “bad eggs.” “These unlicensed third-party preparers are a disaster for the system,” Trinca said. “There’s a gigantic amount of fraud.”

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